Chrysler Dealer Closings Add To Commercial Property Woes

The announced closings of more than 700 Chrysler dealerships nationwide is poised to add to the rising vacancy rates in the embattled commercial real estate industry.

The ensuing fallout, however, is likely to shake out differently compared to the broader retail market, given complicated land configurations, rich property values and geographic issues unique to car dealerships.

"We're in the middle of a recession in which the attention to real estate difficulties is starting to turn to commercial real estate," said Paul Taylor, chief economist for the National Automobile Dealers Association. "The timing is absolutely difficult for these dealers to try and sell the property if they closed the dealership."

Chrysler LLC said it is looking to drop 789 dealers from its retail network of nearly 3,200 to streamline business and move the bankrupt auto maker to profitability. Chrysler noted in the court filing that it has significantly more dealers than rivals Toyota Motor Corp. (TM) and Honda Motor Co. (HMC), but sold fewer cars. General Motors Corp. (GM) is also expected to tell some dealers Friday that they face closure.

Taylor said NADA forecast the recession would force 1,200 dealerships to shutter this year with at least 86% of those closings coming from Chrysler, Ford Motor Co. (F) and GM. And, they estimated that roughly 360 Dodge and Jeep dealerships would close due to the recession and credit issues.

The looming closings from Chrysler dealers comes amid a massive wave of consolidation among auto dealerships and dark stores. To compensate for declining profits in car sales, auto dealers have been putting their properties up for sale, which, in many cases, are more valuable than their business.

"The property is still worth a good or great deal of money," said Michael Fay, president of Colliers Automotive Real Estate Services group. "This is probably the area that will save a lot of these dealers because of the real estate...They have nothing else."

Many auto dealers own their real estate and likely purchased the land many years ago. Even though property values have sharply declined over the last two years, they can still reap big profits.

Still, many dealers aren't taking comfort in this valuable collateral. "These buildings are sole-source facilities," said Craig Bickmore, executive director of the New Car Dealers of Utah.

"It's not good, I'll tell you that," he added "It's going to adversely affect our state, sales tax, property tax, employment, any kind of a commerce situation."

Colliers' Fay anticipates a growing number of bankruptcy filings from independent dealers given that many probably borrowed money against their real estate for property upgrades amid pressure from manufacturers to continually modernize their facilities.

As with all real estate, location is paramount. Industry experts say auto dealers looking to unload their land will do better if they are located in high-density and very developed areas. The configuration of many dealerships can make it difficult to repurpose them for other commercial uses, but experts say that used-car dealerships, shopping centers, big-box retailers or smaller self-storage facilities are viable replacement tenants.

"The real estate shift, I don't think is going to be that great," said Gerard N. Murphy, president of the Washington (D.C.)-Area New Automobile Dealers Association, which has 250 members.

He remained optimistic that the pioneering spirit of American dealers will sustain the industry during these difficult times.

"The dealers are entrepreneurs, very Americana in that respect," he said. "They're very resourceful."

-By A.D. Pruitt and Dawn Wotapka, Dow Jones Newswires, 201-938-2269, [e-mail]

(Jeff Bennett contributed to this report.)